The European Central Bank (ECB) was expected to pump half a trillion euros (US$745 billion) into the eurozone’s troubled financial system for the second time in as many months yesterday in what it hopes will be the last such operation to fight the eurozone crisis.
Banks can stock up on as much of the ultra-cheap, three-year loans as they like at the second of the twin funding operations — a ploy the ECB unveiled late last year to dampen tensions on eurozone bond markets that threatened to tear the bloc apart.
ECB President Mario Draghi, whose native Italy was at the epicenter of the crisis when the bank -announced the measure late last year, said after the first of the Long Term Refinancing Operations (LTRO) operations, that “a major, major credit crunch” had been averted.
Banks used much of the 489 billion euros they borrowed at the first LTRO to cover maturing debt. Draghi has urged them to lend out the funds they tapped at yesterday’s operation to households and businesses, helping strengthen economic growth.
The LTROs have sucked much of the heat out of the eurozone crisis and given governments time to work out sustainable budget and growth policies for affected countries on the periphery of the bloc.
Financial markets are watching their progress carefully.
“Once the liquidity is injected, what will count is if the periphery countries generate growth,” said Andrew Bosomworth, senior portfolio manager at PIMCO. “Without growth, the LTROs are a bridge to nowhere.”
A Reuters poll of 30 euro money market traders on Monday showed expectations of a 500 billion euro allotment, with forecasts ranging from 200 billion euros to 750 billion euros.
Rating agency Fitch said on Tuesday that a larger number of relatively strong European banks are likely to profit from the second wave of cheap money.
The LTROs are unleashing a wall of money just as the US Federal Reserve and the Bank of England have with their “quantitative easing” program.
Banks appear confident there is no stigma to taking the cash and say the cheap loans are too attractive to pass up.
“We do not blush to say we bid for 11 billion euros in the first tender and now we shall ask for a similar amount. Other competitors have said they will go for more,” BBVA chairman Francisco Gonzalez said.
Italian banks, including UniCredit, Intesa Sanpaolo and smaller Monte dei Paschi, took 116 billion euros in December last year, and Spanish and French banks about 100 billion euros each, according to analysts and sources.
However, some banks are still holding back and some executives and investors reckon the stronger banks should show they can stand on their own feet.
The ECB funds are “like methadone for junkies,” said one senior European banker.
If banks used the first LTRO to plug their funding needs and fend off a credit crunch, ECB officials hope they will use the second to issue loans and to buy higher--yielding bonds more aggressively, especially from Italy.
Anecdotal evidence suggests that banks, especially in Spain but also in Italy, used the first LTRO to make the most of this “Sarkozy trade” — a term adopted by markets after French President Nicolas Sarkozy said governments look to banks that tapped the ECB operation to buy their bonds.
Spanish banks bought a net 23.1 billion euros of government debt last month and Italian ones 20.6 billion, both record increases.
Italy faces a debt issuance hump over the next few months and could do with the second LTRO fuelling demand for its debt. It needs to sell about 45 billion euros of its bonds a both this month and next month versus 19 billion last month.
The ECB operations differs from quantitative easing in that they provide liquidity against guarantees instead of intervening directly in bond markets. They achieve a similar result while allaying the concerns of some policymakers — led by the Germans — about funding governments.
ECB policymakers in Germany and beyond are nonetheless worried that the central bank risks storing up problems for the future by releasing the wave of cash through the LTROs.
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